Establishing a Legal Presence
The Israeli Companies Ordinance (ICO) defines a company as a corporation formed and
registered in Israel, in accordance with the Israeli law. A company must be registered at the Registrar of Companies which is a relatively short and simple process. According to figures from the World Bank, the total cost of setting up a corporation in Israel may reach US$ 2,000 (depending on the complexity of the company’s structure) and will take about two weeks, including registration of the corporation with the tax authorities in Israel.
In addition, Israel’s laws regulate incorporation through partnerships. Whereas the partnership will be recognized as a separate legal entity to its partners, for tax purposes it is considered to be transparent, and its tax liabilities are assumed by its partners.
Non-profit organizations may be incorporated as a Voluntary Association, or operate as a Limited Liability Company that has been incorporated as a Public Benefit Company. These entities must make comprehensive reports to the Registrar of Voluntary Associations or the Registrar of Companies, as the case may be. By law,
non-profit organizations may be exempted from income tax on their activity. The receipt of an exemption is subject to certain conditions, including meeting of criteria prescribed in the law and procedures.
All Israeli companies must submit annual financial statements that are audited by an Israeli CPA. These audited statements will also include an audited statement of the adjustment of the reported income to taxable income for income tax purposes.
Laws on foreign investment
Israel has no unique laws concerning foreign investments or foreign investors. The various laws of incorporation, regulations and orders applicable in Israel apply both
to foreign investors and residents, but there may be specific regulations for foreign investors in existing laws or legislations.
According to the Israeli tax laws, there are a number of tax exemptions and forms of relief for foreign resident investors, such as exemption from capital gains tax in the following cases:
- From s sale of a share that is traded in the Israeli stock exchange;
- From a sale of holdings in an R&D company;
- Sale or realization of derivatives;
- Sale of a mutual fund to an overseas resident.
In addition, an exemption from tax on revenue from foreign currency interest will be given subject to a number of conditions that are prescribed in the law.
Creating a permanent establishment (PE)
Any business activity carried out in Israel, which has a permanent place of business and results in revenue being generated, is likely to be deemed as having created a “permanent establishment”. The definition of a permanent establishment in Israel is in accordance with the OECD Model Tax Convention. Article 5(1) of the OECD Model Tax Convention states this to be ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. According to interpretation of the OECD Model Tax Convention, three cumulative conditions must be fulfilled in order for the activity to be considered a permanent establishment:
1. There is a place of business in that country, such as premises or, in certain circumstances, machinery or equipment; 2. The business place is ‘fixed’, i.e. the company operates out of a specific place of business, with a certain degree of permanence; 3. Management of the enterprise’s business is done through this ‘fixed’ place. Should a dependent representative be operating on behalf of a foreign company, it does not have to meet all three conditions in order to be deemed as having created a permanent establishment.
A dependent representative is one who is subject to the instructions of the foreign resident, does not bear any risks and has no additional occupations besides being a representative of that company.
Company obligation/compliance requirements
An Israeli company must submit annual financial statements that are audited by an Israeli CPA. These statements are submitted to the tax authorities following approval of the company’s directors, along with an audited statement of the adjustment of the reported income to taxable income for income tax purposes. In addition, the company must submit an annual report to its shareholders and additional legal information to the Registrar of Companies.
All companies with employees must submit to the tax authorities’ periodical reports (usually once a month) and an annual report of payments to employees and the tax withheld from them. In addition, a company must submit reports concerning the payments and the tax withheld from suppliers.
These duties apply to all companies that are incorporated in Israel, and with certain adjustments to overseas corporations operating in Israel as well.
Public companies must appoint an internal auditor and have two external directors on their board of directors. These companies are bound by broad provisions of law and regulations pursuant to securities legislations in Israel. Among their other obligations, public companies must submit quarterly reports reviewed by their CPA and annual audited financial statements that are included in their comprehensive periodical report. These reports are open for inspection by the public, including through the XBRL standard via the Internet.
Bankruptcy and business disposal
The laws of Israel grant protection to holders of rights in corporations against creditors, as well as protection to creditors of a debtor against concealment of assets that are used as collateral for credit that it has given and goods that it has supplied to a failed corporation.
A company may ask the court for protection against creditors, within legal proceedings that allow for this protection to be used, for a limited period of time, with the intent of reorganizing its assets and liabilities in a manner that will allow it to continue to run. In case of
terminal business failure, the corporation will be liquidated, voluntarily or at the request of creditors, under court supervision. Holders of collaterals, such as liens on certain assets that have been registered at the appropriate registrars, may apply to the court and, in case of business failure, request enforcement of repayment of the debt
by appointing a receiver for the company or its relevant assets. The repayment of a debt that is not secured may be enforced, in certain cases, by a system that operates in conjunction with the court – the execution (bailiff) office.